Beyond Greed, An Ethical Self-Deception

'As the years went by I realized that my arrest and this day would inevitably come." So claimed disgraced Bernard Madoff in his plea statement on March 12. Yet, remarkably, he continued to defraud investors right up to his arrest in December.

Ask anyone to explain his behavior or that of others in the scandals over lavish parties and bonuses in bailed-out banks, and the first answer is almost always "greed!"

OK, but that response covers a multitude of sins. Yes, some people are simply selfish and unprincipled. But we humans are more complicated than that. Our predictable tendency to self-deception often explains unethical behavior, as easy rationalizations blind us to the truth of our actions. Madoff, for instance, claims that he believed his Ponzi scheme would be short-lived when it began in the early 1990s.

Mindless acceptance of "the way we do things around here" freezes perceptions and blocks moral sensitivity; thus American International Group and other companies continue to justify bonuses and lavish entertainment that infuriate the rest of us. Some investors fall into the same self-deception: Madoff says that his "clients, like all professional investors, expected to ... outperform the market." When it came to investing, Madoff's investors (and maybe the rest of us) apparently live in Lake Wobegon, where everyone is above average.

In addition, some morally bad outcomes stem from a different source. Surely the first ethical responsibility of a business is to perform its mission effectively. But even the professionals admit they did not fully understand the complex investments that helped deepen the financial crisis. Poor business decisions hurt people even if the decision-makers committed no intentional fraud but merely failed to do their jobs well. If General Motors fails, the economic devastation will extend far beyond its shareholders and employees.

Company culture and systems can also contribute substantially to negative outcomes. If the culture fosters short-term thinking and get-rich-quick opportunities, then some people will cross legal and ethical lines. Add to that the failure of our regulatory system to restrain reckless business decisions as well as countless unwise personal financial decisions. There is ample blame to share.

Bernard Madoff knew he was doing wrong and he kept it up. Was it greed alone or did he deceive himself into an ever-deepening spiral, digging the hole deeper even as he thought he could eventually climb out? Only he really knows. But we do know that in addition to utterly contemptible criminal behavior like his, people often make poor decisions because moral blinders such as rationalization and arrogance cloud their judgment.

To limit self-deception, we must strengthen individual character, to be sure. But we must also learn to shed our moral blinders, build effective cultures and systems of integrity in business, and devise creative regulatory mechanisms that identify problems before they become crises.

Strengthening organizational integrity in a company, for instance, begins with senior leaders who know that ethics flows from emphasizing underlying values, not mere technical compliance.

A 2007 national survey by the Ethics Resource Center, an independent business ethics think tank, found that a strong ethical culture — fostered by senior management and supervisor reinforcement — reduced misconduct by 75 percent compared with companies with weak ethical cultures.

When leaders emphasize the "why" behind the rules, employees and managers are more likely to develop shared commitment to doing the right thing. They also recognize their responsibility to help government improve regulatory systems with constructive cooperation and criticism, not narrow interest-based lobbying. Many companies demonstrate this kind of organizational integrity every day — they just don't make the headlines.

Our anger at Madoff and the widespread public outrage at Wall Street will be misplaced if we assume it is only a matter of curbing individual greed. Ethically responsible business has always been the right thing to do; but in the long run, it is also a business and social necessity.

• Michael Rion of West Hartford is a national consultant in ethics and management.Do you agree? Or disagree? Be heard with a Letter to the Editor: www.courant.com/writeletter